Bank of Canada Could Lean a Little More Dovishly Wednesday

The probability of Canada’s central bank delivering another surprise on Wednesday seems pretty slim considering it sprang one just six weeks ago.

The Bank of Canada will likely keep its benchmark overnight target rate at the 1% level it’s stood at since September 2010, at its last policy statement of the year, according to all the economists at the 12 primary dealers of government securities surveyed by the Wall Street Journal.

All but one–Deutsche Bank Canada–don’t envisage borrowing costs rising until 2015. Deutsche Bank predicts the overnight rate will be at 1.25% at the end of 2014 after one rate hike in the second half of the year.

The Bank is also expected to repeat the neutral policy stance it adopted in October, when it unexpectedly dropped a rate-hike bias adopted 18 months earlier under former governor Mark Carney.

Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets, said he’s been fielding calls from clients about the possibility of another surprise Wednesday after the latest inflation reading showed the headline rate was just 0.7% year-on-year in October.

But he described the figure as “overplayed.” Other data, including a surprisingly strong 2.7% annualized economic expansion in the third quarter, the best in two years, have surprised on the upside.

Moreover, Mr. Chandler said, the Bank’s quarterly findings on inflation expectations from a survey of businesses won’t be available until January, so there’s little impetus for any change this week.

“I’d be very surprised if they (the central bank) change their tune,” Mr. Chandler said.

Derek Holt, vice-president of economics at Bank of Nova Scotia, assigns a 30% probability to the central bank voicing more concern about the inflation undershoot.

But he, too, thinks it’s more likely to happen in January when the next quarterly Monetary Policy Report is released, and Governor Stephen Poloz holds a press conference where he would have “the ability to explain any change in the story line.”

A small minority of economists believe the Bank may have to cut rates next year if inflation continues to surprise to the downside, and if household debt stabilizes.

A rate cut is an “extreme decision” that’s only likely if the economy is on the verge of another recession, according to Mr. Leitao. He said the Bank is more likely to stay on the sidelines for a prolonged period.

According to Mr. Holt, financial markets are underpricing the probability of a rate cut. Still, “things would have to get materially worse for the Bank of Canada to fire off its last…bullets by way of rate cuts,” he said.

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